Market Efficiency Isn’t A Myth

In a series of previous articles on Seth Klarman’s book, “Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor,” I showed how his statement that indexing assures mediocre returns was very clearly incorrect. I demonstrated as well that many of his additional contentions about indexing and market efficiency were also false. Today I’ll conclude by examining some of Klarman’s other claims.

When discussing the efficient market hypothesis, Klarman asserts: “Yes, the market does tend to incorporate new information into prices, yet the market is far from efficient. There is simply no question that investors applying disciplined analysis can identify inefficiently priced securities and achieve superior returns.” He added: “The pricing of large-capitalization stocks tends to be more efficient than that of small-capitalization stocks … and other less-popular investment fare.”

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